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Lim, Michael Mah-Hui
Year of Publication: 
Series/Report no.: 
Working Papers, The Levy Economics Institute 532
This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategiesleveraging and financial risk mismatchingthat led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalancestrade imbalances, financial sector imbalances, and wealth and income inequality. The consequences of excessive risk, moral hazards, and rolling bubbles are discussed.
Subprime Mortgage Crisis
Credit Crunch
U.S. Housing Bubble
Collateralized Debt Obligations
Credit Default Swaps
Wealth and Income Inequality
Leveraged Buyout
Mortgage-backed Securities
Current Account Imbalance
Credit Risks
Financial Innovation
Moral Hazard
New Monetarism
Document Type: 
Working Paper

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